DEFINITION of 'Decision Analysis - DA'

Decision analysis (DA) is a systematic, quantitative and visual approach to addressing and evaluating important choices confronted by businesses. Decision analysis utilizes a variety of tools to evaluate all relevant information to aid in the decision making process and incorporates aspects of psychology, management techniques and training, and economics. It is often used to assess decisions that are made in the context of multiple variables and which have many possible outcomes or objectives. It can be used by individuals or groups attempting to make a decision related to risk management, capital investments and strategic business decisions. A graphical representation of alternatives and possible solutions, as well as challenges and uncertainties, can be created on a decision tree or influence diagram. More sophisticated computer models have also been developed to aid in the decision analysis process.

The term decision analysis originated in 1964 by Ronald A. Howard, professor of Management Science and Engineering at Stanford University.

BREAKING DOWN 'Decision Analysis - DA'

Decision analysis (DA) can be employed by large and small corporations alike when making various types of decisions including management, operations, marketing, capital investments or strategic decisions.

Example of Decision Analysis

For example, if XYZ real estate development company were deciding whether or not to build a new shopping center in a location, they might examine several pieces of input to aid in their decision-making process. These might include traffic at the proposed location on various days of the week at different times, the popularity of similar shopping centers in the area, financial demographics and spending habits of the area population, local competition, and preferred shopping habits of the area population. All of these items could be put into a decision analysis program and different simulations could be run that would help XYZ company make their decision about the shopping center.

Despite the helpful nature of this tool, critics of decision analysis cite "analysis paralysis," which is the over-thinking of a situation to the point that no decision can be made, as a negative and likely outcome of decision analysis practices. In addition, some researchers who study the methodologies utilized by decision makers argue that this type of analysis is not often used.

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